FIN 331 Ch. 8

What is the value of a stocks if next year's dividend is $6, the discount rate is 11 percent and the constant rate of growth is 3 percent?

$75 because $6/(0.11-0.03)

The NYSE differs from the NASDAQ primarily because the NYSE has:

A physical location; an auction market; specialists

Which of the following are cash flows to investors in stocks?

Capital gains; Dividends

In the dividend discount model, the expected return for investors comes from which two sources?

Growth rate; Dividend Yield

Which of the following is a feature of common stock?

It generally has voting rights; It has no special preference in bankruptcy; It has no special preference in receiving dividends

One common reason for having two classes of common stock with different voting rights is:

It is easier for insiders such as founding families to maintain control of the company

NASDAQ has which of these features?

Multiple market maker system; computer network of securities dealers

Will is deciding whether or not to buy Dang Corporation stock, whose current price is $54.95. Dang paid a dividend of $2.17 this year. Will estimates that dividends will grow very quickly, at a rate of 12%, for the next four years. After that, he expects the dividend growth rate to fall 5%. Should Will buy the stock if his required rate of return is 10%?

Yes; using the two stage growth model, the stock's value is $58.06

All else constant, the dividend yield will increase if the stock price ___.

decreases

Preferred stock has preference over common stock in the:

distribution of corporate assets; payment of dividends

The constant-growth model infers that ___.

dividends change at a constant rate

An asset's value is determined by the present value of its ___ cash flows.

future

The ___ can be interpreted as the capital gains yield.

growth rate

Stock price reporting has increasingly moved from traditional print media to the ___ in recent years.

internet

Three special case patterns of dividend growth include:

non-constant growth; zero growth; constant growth

The trading of existing shares occurs in the ___ market.

secondary

Mota Motors has eight directors on its board, two of whom go up for election each year. This is an example of a:

staggered board

The two most important stock markets in the U.S. are the New York Stock Exchange and ___.

the NASDAQ

A benchmark PE ratio can be determined using:

the PEs of similar companies; a company's own historical PEs

The dividend yield is determined by dividing the expected dividend (D1) by:

the current price

Dusty Corporation has an issue do preferred stock that pays a dividend of 7% of its state value, which is $100. Which of the following would be a commonly used name for that preferred stock?

$7 preferred

Which of the following are reasons why it is more difficult to value common stock than it is to value bonds?

The life of a common stock is essentially forever; The rate of return required by the market is not easily observed; Common stock cash flows are not known in advance

Which of the following is usually a right of common shareholders?

The right to a proportional share of dividends paid; Voting rights; The right to purchase a proportional share of new stock issued

The largest number of NYSE members are registered as ___.

commission brokers

A PE ratio that is based on estimated future earnings is known as a ___ PE ratio.

forward

The value of a firm is the function of its ___ rate and its ___ rate.

growth; discount

Which of the following occurs in the primary market?

newly-issued stocks are initially sold

When the stock being valued does not pay dividends,

the dividend growth model can still be used

If the growth rate (g) is zero, the capital gains yield is ___.

zero

You expect the following dividends from ABC Stock: Year 1- $3.00 Year 2- $2.00 Year 3 $1.00 You expect that from year 4 onward, the dividend will grow at a constant 3% growth rate. If your required rate of return is 7%, what is your estimate for the current stock price?

$26.39

Scott Corporation does not pay dividends. The PE ratio for its industry is 13.3, and Scott's EPs were $1.47. At what price should Scott's stock trade?

$19.55

In which way(s) is preferred stock like a bond?

Preferred shareholders receive a stated value if the firm liquidates, like bondholders; Preferred shareholders receive a stated dividend, similar to interest on a bond; Some preferred stock has credit ratings, like bonds; Preferred stock sometimes has a sinking fund, giving in a set maturity like bonds.

Match the following terms relating to stock valuation. P1 D1 R P0

Price in one year; Dividend in one year; Discount rate; Price today

Which of the following entities declares a dividend?

The board of directors

A zero-growth stock pays a dividend of $2 per share and has a discount rate of 10%. The stock's price will be 0.

20.00

What information do we need to determine the value of stock using the zero-growth model?

Discount rate; annual dividend amount

When valuing a stock, the advantage to considering the stock price in the distant future (rathen than a more near-term price) as a cash flow is that:

when discounted to present value, a stock price in the distant future is nearly zero